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FSCP: FP 99 - Foundations of Financial Planning

FSCP · Work through your exam, one topic at a time.

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FP 99 - Foundations of Financial Planning

FP 99 is the required foundation course of the FSCP curriculum. It tests whether you can see a planning engagement as a process and use the underlying vocabulary - time value of money, risk transfer, marginal taxation, deferral and goal setting - accurately enough to choose the right answer in a short scenario. Expect definitional items plus light computation.

The planning process

  1. Establish and define the relationship (scope, compensation, responsibilities).
  2. Gather quantitative and qualitative client data and goals.
  3. Analyze and evaluate the client's current position.
  4. Develop and present the recommendations.
  5. Implement.
  6. Monitor and update. Exam angle: items ask which step a described action belongs to. Monitoring is a required step, not an afterthought, and jumping from step 2 straight to a product is a classic wrong answer.

Time value of money

  • FV = PV(1 + i)^n; PV = FV / (1 + i)^n.
  • Ordinary annuity payments occur at period end; annuity due payments at period start, making the annuity due larger by a factor of (1 + i).
  • Real return ≈ nominal return − inflation (exactly: (1 + nominal)/(1 + inflation) − 1).
  • Rule of 72: doubling time ≈ 72 ÷ annual rate.

Risk, tax and goal foundations

  • Insurance transfers a low-probability, high-severity loss you cannot self-fund; it is not an accumulation vehicle.
  • The marginal rate applies to the next dollar and drives planning decisions; the average rate is total tax ÷ total income.
  • Tax deferral postpones taxation of growth; it does not eliminate it.
  • A fundable goal needs a dollar amount, a date and a priority.

Worked example

A client has $25,000 for a goal 12 years away, assumed growth 5%, inflation 3%. Nominal value = 25,000 × 1.05^12 = 25,000 × 1.7959 = $44,897. In today's dollars that is 44,897 ÷ 1.03^12 = 44,897 ÷ 1.4258 = $31,489. Reasoning: the growth is real only after inflation is removed. If instead the client needs $45,000 in today's dollars, the nominal target is 45,000 × 1.4258 = $64,161, requiring 64,161 ÷ 1.7959 = $35,726 today - a very different funding answer from the naive "it doubles" reading.

Traps that cost marks

  • Mixing ordinary annuity and annuity due, or using an annual rate with monthly periods.
  • Applying the average tax rate to a marginal decision.
  • Quoting a future nominal amount as if it met an inflation-adjusted goal.
  • Treating cash value life insurance as a pure investment comparison.
  • Skipping data gathering and going straight to a recommendation.